Case Summary: Sunderland v. Toronto Regional Real Estate Board

  • January 03, 2024
  • Soudeh Hosseini

The Federal Court’s ruling in Sunderland v. Toronto Regional Real Estate Board, 2023 FC 1293 ("Sunderland"), emerges as potential turning point with far-reaching implications for the Greater Toronto Area (“GTA”) Real Estate Industry. In the context of a motion to strike, Chief Justice Paul Crampton of the Federal Court (the “Court”) examined whether the Statement of Claim alleged sufficient facts against each of the named defendants, which, on their face, fell within the purview of s. 45(1) of the Competition Act, R.S.C. 1985, c. C-34 (the “Competition Act). The Court employed a generous and holistic reading, as instructed in R. v. Imperial Tobacco Canada Ltd., 2011 SCC 42 at para. 23 (“Imperial Tobacco”), to conclude that the action may proceed against the brokers (defined below) and associations (defined below) on the narrower claim that the brokers and associations attempted to control the price for buyer brokerage services.  With respect to the franchisors, the Court held that the claims shall be removed. This summary solely focuses on the Court’s analysis of whether the Statement of Claim discloses a reasonable cause of action under s. 45.

The proposed class action comprises individuals who sold residential real estate in the Greater Toronto Area (“GTA”) dating back to 2010. The plaintiff alleges that several leading brokerages (collectively, the “brokers”) and their "co-conspirators" conspired, agreed, or arranged with each other to fix, maintain, increase, or control the price for the supply of buyer brokerage services in contravention of s. 45. Also named in the Statement of Claim are the Toronto Regional Real Estate Board (“TRREB”) which owns and operates the Multiple Listing Service (“MLS”), and the Canadian Real Estate Association (“CREA”) who owns certain other MLS marks. The plaintiff further alleges that TRREB and CREA (collectively, the “associations”) and certain franchisors of brokerage services (collectively, the “franchisors”) facilitated and contributed to the execution of this arrangement through promulgation of rules to which member brokerages are supposedly bound.

The test for evaluating whether the pleadings disclose a reasonable cause of action is whether “it is plain and obvious, assuming the facts pleaded to be true, that each of the plaintiff’s pleaded claims disclose no reasonable cause of action”: Atlantic Lottery Corp Inc. v. Babstock, 2020 SCC 19, at para. 14. The Court applies this standard throughout to ascertain if the alleged facts plausibly satisfy each element and sub-element of s. 45.

Section 45 comprises three constituent elements: (i) a 'conspiracy, agreement, or arrangement,' (ii) with a 'competitor,' and (iii) to engage in one of the activities outlined in paragraphs 45(1)(a)–(c), respectively. These activities are as follows: (a) to fix, maintain, increase or control the price for the supply of the product; (b) to allocate sales, territories, customers or markets for the production or supply of the product; or (c) to fix, maintain, control, prevent, lessen or eliminate the production or supply of the product.

“Arrangement” and “competitor” elements – pleadings clear the first two hurdles

The plaintiff contended that the combination of one CREA Rule 11.2.1.3 and four TREBB Rules (R-705, R-710, R-730, and R-740) (collectively referred to as the “Buyer Brokerage Commission Rule”), forms an arrangement falling under the scope of s. 45(1) (the “Arrangement”). They also posited that express agreement by members to be bound by the TREBB and CREA rules, including the Buyer Brokerage Commission Rule, could be viewed as an “agreement or arrangement” under s. 45(1).

In deliberating on these arguments, the Court underscored its generous approach, which errs on the side of permitting a novel but arguable claim to proceed. It decided that these facts, if assumed to be true, were sufficient to meet the pleading requirements of the “agreement or arrangement” element. The Court further suggested that the plaintiffs seek leave to include in the pleadings that each Brokerage Defendant recognizes and understands that each must agree to the Buyer Brokerage Commission Rule.

The Court held that the plaintiff’s assertions that the TRREB and CREA member brokerages compete in the GTA residential real estate market during the relevant period satisfied the “with a competitor” criterion in s. 45(1).

“Conspiracy” and “to fix, maintain, or increase” – struck

Next, the Court directed its focus on the sub-elements under s. 45(1)(a), with the remaining subsections (b)-(c) being removed for a lack of pleaded material facts. Some claims were struck as the Court advised of the need for additional facts with respect to an object or concerted purpose on the part of the brokers “to fix, maintain, or increase the price for the supply of the Cooperating Brokerage Services” (emphasis as per the original text). The Court considered the pleadings regarding aligned interests and the effects of thwarted competition but held they did not squarely address the requisite actus reus of an actual conspiracy or agreement to fix, maintain, or increase prices.

“Control” – TRREB and CREA rules arguably express control over who and when

The Court maintained a generous and holistic approach to interpreting the Statement of Claim, which contained allegations that certain aspects of the Brokerage Commission Rule, on their face, "control" prices of brokerage services and are worth considering.

First, the Court explored the claim that the Brokerage Commission Rules control the cost of cooperating brokerage commissions by “forcing sellers to bear the cost of services used by the buyers”. The Court noted that these allegations align with the plain language of CREA Rule 11.2.1.3, which explicitly mandates the listing brokerage to pay the cooperating brokerage compensation. The Court further observed that the four TRREB rules arguably reinforce this CREA Rule, indicating that the listing brokerage will offer a commission to the cooperating brokerage, indirectly paid by the seller of the property in question.

Summarily, the Court found it arguable that the Brokerage Commission Rules explicitly contemplate a form of control falling within the purview of s. 45 by determining who pays the commission. This control extends to preventing cooperating brokerages from negotiating directly with their clients, excluding the "buying" side from participating in establishing the price of the services. Additionally, the Court considered that further control is arguably exerted through TRREB rules, notably Rule 730, which prescribes when a change of commission/compensation may be requested, and Rule 740, which specifies the timeframe during which a commission cannot be altered.

Amazon and legislative history do not do enough to halt the case

The Court referred to a recent case, Difederico v. Amazon, 2023 FC 1156, at paras. 79-113, to concur with the defendants’ submissions that the plain meaning, legislative history and jurisprudence around s. 45 all suggest it is intended to apply exclusively to “hard core cartel agreements […] which are unambiguously harmful to competition”. Nevertheless, the Court disagreed with the submissions that that the Arrangement plainly does not involve conduct contemplated by s. 45 and that it is destined to fail.

Acknowledging the defendants' claims that the "TRREB Rules and CREA Rules were promulgated to promote increased transparency in the real estate industry and to establish mechanisms to facilitate a very large number of transactions among their members in an orderly manner," the Court qualified that this is not plain and obvious at this point in the proceedings. This determination is yet to be established based on the evidentiary record during the hearing on the merits. Furthermore, the Court emphasized that a broader agreement that may have legitimate objectives cannot shield what would otherwise be a horizontal agreement prohibited by s. 45.

Takeaways

Notably, the Court’s generous approach did not cause it to overlook the lack of pleaded facts relating to a conspiracy. However, it resulted in the Court recognizing a potentially “novel but arguable” claim – namely an arrangement where the brokers and associations control some aspects of the commission structure, such as who pays and when changes may be made. This alleged control is achieved through the establishment of rules that all the involved brokers agree to conform with.

While the Arrangement may not involve a shadowy backroom deal among conspirators, the Court declined to classify it as one that definitively falls outside of the conduct contemplated by s. 45. As such, critics may view the case as ambitious, with the Court's scrutiny seemingly lenient in allowing the case to advance without explicit conspiratorial elements.

Perhaps, this decision is consistent with a broader culture shift in the courts to proportionately address the issues to the proceeding. In this case, a motion to strike was deemed an inappropriate forum to decisively discuss the application of s. 45 to the unique real estate sector in the GTA. As the narrower claim advances to trial, further insights can be anticipated.

If successful on its merits, Sunderland could prompt a change in the commission structures and practices in the real estate industry in the GTA, potentially ushering in a new era of robust negotiations between buyers and sellers.

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